What has been observed in the United States for some time has also prevailed in Europe in recent weeks: so-called inverted yield curves are currently dominating the picture on the international bond markets.

Yield curves are referred to as inverse when the shorter-term yields are higher than the longer-term ones.

This is currently the case with federal bonds, the first time since November 1990. Two-year German government bonds yielded 2.107 percent on Tuesday, ten-year only 1.902 percent.

Inverted yield curves are seen as a signal for a recession on the financial markets, and that was also the case between 1990 and 1992, when the inverted yield curve on federal bonds anticipated the 1993 recession.

Markus Fruehauf

Editor in Business.

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In a normal yield curve, the long-term returns are higher than the short-term returns because the investor demands higher compensation in the form of interest for going without their money for a longer period of time.

However, the flatter the yield curve becomes, i.e. longer and shorter-term interest rates converge, the weaker the economic expectations.

If the curve inverts, the markets are assuming an economic slump in the following four to eight months.

"Inverted yield curves signal that investors are increasingly investing in longer-dated bonds despite higher short-term interest rates, which is why demand is increasing here and prices are rising accordingly, and thus yields are falling," wrote Robin Beugels, head of investment management at private bank Merck Finck, on Tuesday.

This behavior shows

In the United States, the government bond yield curve has been inverted since July.

In the third quarter, the American economy surprisingly grew by 2.6 percent compared to the same quarter of the previous year.

The German economy also proved to be surprisingly robust in the third quarter, with growth of 1.2 percent.

However, weaker growth in private consumer spending and declining imports point to economic headwinds in the USA.

Economists at Danske Bank expect the US Federal Reserve to continue raising interest rates and drive the US economy into recession from the second quarter of 2023.

According to their expectations, however, this should be mild with a GDP decline of 0.2 percent in the coming year.

Conflicting signals

Axel Botte, market strategist at the French asset manager Ostrum, sees contradictory signals from the inverted yield curves with the mood indicators that have recently improved again, such as the German Ifo index.

On the one hand, sentiment data would suggest that the danger of a recession is decreasing.

Massive fiscal support plans – in France, Italy and Germany, the aid packages could total 83 billion euros next year – would support the economy.

On the other hand, the inversion of the yield curves that has now also occurred for Bunds has always been a reliable indicator of an imminent decline in economic activity, according to Botte.

On the other hand, Merck-Finck strategist Beugels does not see the inverted yield curve as a negative signal.

It can be taken not only as a harbinger of a recession, but also as a sign of a turning point in inflation.

This has been observed in the USA in recent months.

Beugels points to the inverted yield curve at the beginning of July, which market participants used to anticipate the temporary turnaround in inflation with relative precision.

According to the Merck-Finck strategist, this peaked in June at 9 percent and has now been declining for 4 months (most recently 7.7 percent).

“The inverted yield curve could therefore be a reason to breathe a sigh of relief this time, especially for consumers and industrial bulk buyers who are plagued by inflation.

Because a temporary recession is always better for the economy and citizens to cope with than persistently high inflation,” writes Beugels.